Up in smoke: Counties gave up millions from tobacco settlement for short-term gains

Jun. 16, 2012

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• Westchester $481.5 million Awarded $320 million Received • Rockland $140 million Awarded $57.5 million Received • Putnam $38 million Awarded $17.9 million Received

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Lower Hudson Valley counties forfeited most of the $659 million they were to receive from a 1998 legal settlement with tobacco manufacturers, selling off their interests and scattering the short-term gains in financial deals that cost taxpayers tens of millions, a Journal News investigation found.

Westchester, Rockland and Putnam counties sold off their tobacco-settlement interests years ago, turning down 25 annual payments and opting for lump-sum payouts that they have little or no access to today when they are scrambling for revenue sources. In one case, Westchester gambled against the bond market – and lost.

Instead, most of the money went to capital projects and to shore up health-care facilities that continue to struggle financially despite the infusion of millions of tobacco dollars.

The newspaper’s investigation, which involved a review of hundreds of state and county records and nearly two dozen interviews with government officials and financial experts, found:

• Westchester County put more than $146 million of its tobacco money into the financially strapped Westchester Medical Center, and another $171 million to pay off earlier, higher-yield tobacco bonds for which it had netted just $89.4 million. The county now gets only about $1.85 million of the nearly $14 million it is designated every year.

• Rockland County sold off 80 percent of its tobacco money in 2001 and the rest in 2003, with all the money used to pay down the debt of the struggling Summit Park Hospital and other county health-care facilities. In the end, Rockland, whose credit rating is at near-junk status, ended up with $57.5 million, just 41 percent of its original share.

• Putnam County may have fared best. Originally estimated to receive more than $38 million, Putnam used its tobacco money for equipment and capital projects, including $3.2 million toward a new emergency command center. But the county ended up with a total of just $17.9 million, less than half its initial allotment.

Current and former county officials defended their use of the tobacco money, saying it kept vital health-care facilities in business and saved taxpayers millions in capital costs. Former County Executive Andrew Spano bristled at any suggestion that Westchester squandered its windfall.

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“To say we squandered the money giving it to the hospital because we lost some of the money in the transaction, if we didn’t do it at the time, the only way we could do it, then we would’ve had problems at the hospital,” said Spano, who was in office when the county sold its settlement money. “The politics in these things are the art of the possible. And this is what was possible at the time.

“Do you save the hospital or do you save the money? We chose to save the hospital,” he said.

But watchdog groups say the counties’ decisions to take up-front payoffs were simply shortsighted.

“In retrospect, the Monday-morning quarterbacking is that this wasn’t a very good idea back whenever they decided, ‘Let’s take the lump sum now and things will be better in the future and we’ll deal with it then,’ ” said Russ Haven, legislative counsel for New York Public Interest Research Group. “It may get you past the immediate hurdle, but it just papers over the structural problems.

“The only one who really made out well with securitizing the tobacco money was Wall Street,” he said. “They were the big winners in this, just as they are in virtually every finance deal.”

Taking less, up front

New York was due to collect more than $25 billion as part of the 1998 Master Settlement Agreement, a landmark deal with the nation’s top four tobacco companies. The settlement stemmed from a lawsuit by 46 states and other U.S. territories seeking compensation for the rising cost of Medicaid and other public health programs due to smoking-related medical problems.

The tobacco companies agreed to pay more than $205 billion nationwide, in 25 annual payments. The actual amounts were to be determined largely by tobacco sales, measured against the 1997 sales figures: As sales rose or fell, so would the payments.

Few if any of the annual payments remain as high today as was calculated in 1998, in part due to the continuing decline in tobacco sales and other market factors.

New York and California still get the largest share, around 13 percent each. New York’s state government gets 51 percent of the state’s allotment, and New York City gets 26.67 percent. Suffolk, Nassau and Erie counties each get 2 percent to 3 percent, followed by Westchester at 1.92 percent.

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Collectively, Lower Hudson Valley counties were to collect $659 million in total. Based on the initial calculations, Westchester would get $481.5 million; Rockland, with a 0.56 percent share, $140 million; and Putnam, at 0.152 percent, just more than $38 million.

But it wasn’t that simple. Participating governments were allowed to sell their shares through nonprofits called tobacco asset securitization corporations, or TASCs. TASCs existed solely to sell bonds backed by future tobacco payments, a process known as “securitization.” It let them cash in quickly rather than collect annual payments. Most governments, fearing tobacco companies would renege or go bankrupt, securitized — including Westchester, Rockland and Putnam.

Securitizing was pricey and complex, replete with legal, brokerage and debt service costs. And like a lottery winner who takes a smaller jackpot by opting for a lump sum up front, securitizing also meant governments ultimately would get significantly less money.

Elizabeth Lynam, vice president at Citizens Budget Commission, a business-backed watchdog group, said it was essentially an expensive way for governments to borrow. Interest rates were generally higher than for municipal bonds, she said, and the investment was riskier because the bonds weren’t backed by the full faith and credit of a government entity.

“You were advancing the money, and there were costs to that up front that were more expensive than traditional borrowing,” Lynam said. Many participating governments, she said, used the newfound money for “a one-shot or two-shot” infusion of cash to close municipal budget gaps.

Bond payoffs costly

Westchester securitized its tobacco money in two blocks. In 1999, it received $103.5 million, about $10.4 million of which went into a reserve account – collateral to back the bonds – and $3.75 million to pay various administrative and legal costs. The remaining $89.4 million went to Westchester Medical Center as part of a subsidy stipulated in a transitional agreement that dated to when the county gave up ownership of the Valhalla hospital.

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In 2005, Westchester got another $216.6 million for its remaining tobacco payments. But $171.5 million was used to pay off the 1999 bonds which, at up to 6.95 percent yield, had to be paid off at maturity value. Doing so did free up $39.6 million held in reserve as part of the 1999 securitization.

The 2005 bonds carried lower yields of 4.65 percent to 5.3 percent. After debt service and other costs, the county was left with $56.9 million. That also went to the medical center, with a stipulation that the county would receive a 13.85 percent residual payment — the $1.85 million it now gets yearly.

Spano, the former county executive, noted that Westchester was instrumental in getting the tobacco money in the first place – it was among the counties that sued the state in 1999 to force it to give all counties a share of the settlement money. He said that when Westchester did sell the first batch of bonds, “there was no history of this stuff. We had to figure out how to do it and what to do.”

But Spano said the county didn’t want to sell the remaining tobacco payments in 2005. It did so, he said, because the medical center’s finances reached a crisis. Westchester had $250 million in unrelated bonds invested in the hospital and feared losing that if the hospital went under.

“We got the best deal we could get at the time,” Spano said. “ ‘Squandered’ has the implication that somehow you could’ve gotten a better deal. That’s not the case here. If we could’ve gotten a better deal, we would’ve gotten a better deal.”

Though the hospital has balanced its budget for several consecutive years, it has continued to struggle. Recent years have brought hundreds of layoffs, the elimination of services and the privatization of others, including health care for county jail inmates. The medical center began this year with a projected deficit in excess of $20 million, prompting more cuts.

Still, present-day county officials also defend the decision to put the county’s tobacco money into the hospital, saying the mere fact that it is still operating is proof that it was well spent.

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“The tobacco-bond proceeds have produced a very positive outcome by shoring up the finances of the Westchester Medical Center, while at the same time protecting the pocketbooks of Westchester County taxpayers,” Ned McCormack, chief adviser and spokesman for Westchester County Executive Rob Astorino, said in a statement.

McCormack said the medical center “received a capital infusion that left it in a better position to finance the Maria Fareri Children’s Hospital,” and to “operate without subsidies from the county.”

“The fact that the medical center today is a viable, independent entity providing much-needed services to patients from Westchester and the region is proof that the tobacco bond proceeds have been used wisely,” he said.

Counties cash in

Rockland sold the last of its tobacco-settlement dollars in 2003. All told, the county got $57.5 million, about 41 percent of the $140 million it originally was slated to collect.

The initial securitization in 2001, pushed by County Executive C. Scott Vanderhoef at the time, sold 80 percent of the tobacco payments for $47.75 million. Two years later, Rockland sold the remaining tobacco payments but didn’t do so on its own.

The county joined with Dutchess and Oswego counties to form the New York Counties Tobacco Trust III, a move that let the three governments share in brokerage, legal and administrative costs. The consortium collected a total of $79.7 million, with Rockland’s share at $9.7 million.

The 2003 joint securitization required Rockland to create a second TASC, the Rockland Second Tobacco Securitization Corp., rather than use the original TASC it created a few years earlier.

Rockland Finance Commissioner Steve DeGroat said all of the securitized tobacco money was designated for “capital projects or redemption of debt.” DeGroat said the money paid down the debt of Summit Park Hospital & Nursing Care Center and other public health-related facilities.

But Summit Park continued to struggle in subsequent years. The facility has racked up annual deficits of about $10 million. Between 2006 and 2009, the county loaned it at least $19 million to keep it afloat.

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In a statement, the Rockland County Executive’s Office defended its use of the money.

“The County of Rockland used its tobacco-bond proceeds to redeem existing debt for the hospital and health departments,” it said. “This had the impact of reducing our future debt service expenses, which we feel was in the best interest of the county, especially in light of our current financial situation.”

As for Putnam, the county sold its tobacco money in 2000 and 2005. The larger sale came in 2000, when Putnam received $13.35 million. The money paid for various building renovations, bridge and road reconstruction and also paid off $5.4 million in debt. A large portion, $3.2 million, helped finance construction of the county’s new emergency operations center.

The remaining tobacco money was sold off five years later, bringing in $4.6 million. That paid off the $1.7 million still owed on the 2000 bonds, with the rest used for equipment that included four one-ton trucks, snow equipment, a backhoe, five buses for the county preschool program and 18 in-car video systems for the Putnam County Sheriff’s Office, county records show.

“Our thought was, look, those moneys were spent on Medicaid,” Putnam County Finance Commissioner William Carlin said. “That settlement was about Medicaid, and Medicaid is the biggest part of the county budget. For years taxpayers spent that money, (on) Medicaid, and that was money that could not be spent on other projects.

“So, we took the settlement money and we spent it on other projects and the payoff of debt and the paving of roads, buying of equipment so we wouldn’t incur more debt,” Carlin said. “And that was our way of returning it to the taxpayers who funded the Medicaid in the first place. That was the logic.”